Valuation Basis - Liquidation
Background: The Company is a sub-assembly supplier for Ford that has lost their contract. They also have an ongoing lawsuit with GM that might bear fruit but should not be depended upon. I came across this company about a year ago and it has been interesting to watch. I bought a few shares in November and if everything goes according to plan this will be the second wind up I have been part of.
Disclosure: I own this one.
Thesis: They are going out of business and are worth a little more than they're trading for.
-Current Assets – The Company has C$65.8MM of current assets as of Q3/14, C$43.8MM being cash, $20.9MM AR, and $1MM prepaid expenses. No discount applied. Their counterpart for AR is Ford and $1MM of prepaid relates to rent and similar expenses, which will be incurred in Q4 (and are included as an expense).
-Liabilities – No discount applied as all are expected to be incurred. Includes $12MM of “provisions”, which account for wind up expenses including layoffs.
-Additional liabilities – Added an additional $5MM of expected liabilities. This is for payout costs for senior staff (regular staff already incurred) as well as plant clean ups as well as some other unplanned “events”.
-Cash flow – The Ford contract is effective until the end of December/14 and they are planning (and expected) to produce until the bitter end. This has been estimated based on the last 3 quarters reduced by a 10% discount.
-Based on the above the expected return is 9% base on today’s opening but is conservatively estimated at 4% when assuming a 25% discount in Q4 cashflows. It should be noted that this is a 7-month return, which equates to a 15% and 8% return when annualized.
Possible Bonus Value:
-General Motors Lawsuit – The Company is suing General Motors for a breach of contract. I don’t apply any value to this but it is interesting as they are suing for $25MM total, which amounts to over $1/share (~50% of today’s price).
-Sale of assets – This valuation assumes no value for their plant equipment. There could potentially be value here but I would not bet on it.
Risks and Problems:
-The company could enter into a new business. I view this as unlikely as they need to a) find a Company that is both large enough for them to remain public b) something they can afford and c) it needs to happen before their AGM in April where it is expected that a motion will be put forward to dissolve the Company. The Company has already given notices to the majority of their staff.
-Exit costs are higher than expected ($5MM). I view this as somewhat unlikely as the majority, if not all, of their salaried workers - except for senior management - have received termination notices and charges have already been applied. The Company has also taken charges for its early lease termination and expected remediation costs. The $5MM should cover the executives and a few small surprises or one medium-sized one. That said, stuff happens.
This is not the most exciting idea but it is a lot more fun than cash. Your comfort and interest should depend on your personal view of management.